The future growth of Islamic banking is dependent on the input by the
regulators and the religious scholars

By
SHABBIR H. KAZMIAug 15 - 21, 2005

Few years back the Pakistan government made a
policy decision to facilitate creation of Islamic banking system in
parallel with the conventional banking system. This may have irked the
religious scholars, who were in favour of elimination of Riba in one
go. However, the effort to create an alternate banking system, which
is compatible and comparable with the conventional banking system, is
yielding better than expected results. The growing faith in Islamic
banking is making the transition smoother and growth is faster than
the growth achieved in many other countries.

The single largest exhibition of the faith in
Islamic banking is the phenomenal growth in deposits maintained with
these banks. According to Pervez Said, Head of Islamic Banking
Department, State Bank of Pakistan, "about 1.5 percent of total
deposits of Pakistani banking system are now with Islamic banks. This
figure may look too small. However, the point of jubilation is that
Malaysia achieved this level in almost 20 years but Pakistan has
achieved this landmark in about two years."

Every Muslim wants to earn
Riba-free income, just
like he wants to eat 'Halal' meat. There was a latent demand and
availability of banking services, which are Sharia compliant, catering
to the needs of this niche market. However, it is important to
highlight the role being played by the central bank and the efforts
being made by the banks. The central bank is busy in creating the
enabling environment and banks are busy in providing access to Sharia
compliant products and services.

The first Islamic bank, offering full fledged
commercial banking services, commenced its operations in 2002. Since
then three more licences have been issued and other three applications
are under process. Nine conventional commercial banks have established
69 designated Islamic banking branches in 11 cities. A comparison of
branches offering Islamic banking facilities with the network of
infrastructure of conventional banks may prompt the critics to say:
"It is too small a growth". However, it is also a fact that
Islamic banks have attained this level in a very short span of time.
As against this conventional banks have been operating in this part of
the world for ages. One of the reasons for the expansion and growth of
the conventional banking system is the empirical evidence of their
success, which provides faith to the clients. The lack of empirical
evidence, however, does not allow people to completely switchover from
conventional banking system to Islamic banking system.

One may ask, if the growth is there, why is it
taking so long in expanding the Islamic banking infrastructure? Some
of the analysts are of the view that expansion in branch network is
due to limited availability of the qualified and experienced bankers
in the country. Since the conventional banking has been in existence
for decades, curriculum and faculty is available for the training of
staff. As against this none of the business schools/educational
institutions has been able to develop curriculum and prepare the
faculty. Whatever expertise was available has been fully deployed and
the demand has surpassed the supply.

According to some sector experts the growing
shortage of human resources in the Islamic banking is due to two
reasons 1) lack of facilities for providing the basic education and 2)
preference of people for working for conventional banks. Whereas, some
analysts are of the view that people with entirely different mindset
are required for the two systems. The heartening fact is that both the
regulators and the banks have realized this impediment and are making
the best efforts to overcome the situation. With the help of religious
scholars and some educational institutions the curriculum for Islamic
banking is being developed. In the first phase training is being
imparted to the trainers, who in due course will impart training to
others. Some diploma and/or certificate courses are being offered and
on-the-job training is also provided. Many business schools offer
courses, which lead to specialization and award of MBA degree in
Banking.

One of the positive points is that the quest for
Islamic banking is global. A number of countries are doing a lot of
research and development work at their own and also sharing the
experience with each other. A lot of literature is available and
researchers and religious scholars are busy in preparing standards,
both for the products and accounting standards. Bahrain Monetary
Authority and Islamic Development Bank in collaboration with the
central banks of various Muslim countries are busy in making Islamic
banking comparable and compatible with the conventional banking.

There is a common perception that Islamic banking
is a preferred choice of Muslims only. However, the global experience
provides empirical evidence that non-Muslims also constitute a
substantial share of the total clientele. The Pakistani experience
also substantiates this. When one of the top five local banks moved
applications for the opening of Islamic banking branches in interior
Sindh, there was some skepticism. However, over the period it started
attracting a lot of business, much higher than the expectations. Later
on it was discovered that bulk of the business was coming from
non-Muslims.

Some of the banking sector experts say that the
keen interest of non-Muslims in Islamic banking is based on their
belief that Islamic banking is more efficient and transparent as
compared to the conventional banking. According to an expert on
Islamic banking, "The effectiveness of Sharia compliant system is
that money creates goods (assets) and services, whereas in the
conventional banking money creates more money and it is often not
backed by assets or services. That is the reason Islamic banking is
emerging as a preferred choice of the clients, irrespective of their
religious faith."

The future growth of Islamic banking is dependent
on the input by the regulators and the religious scholars. The
regulators have to create conducive working environment by adapting
rules and regulations on the basis of ongoing research and
development. The religious scholars have even larger responsibility as
the burden of Ijtihad is on their shoulders. This Ijtihad cannot be
done by the scholars alone and they have to team with economists,
bankers and legal experts, whereby each constituent plays its due
role.

This is an enormous responsibility because each
product has to be scrutinized to ensure full compliance with Sharia.
Then it has to be made compatible with the existing legal and
regulatory framework. This is a long drawn process and none of the
constituents should lose its patience. The process of evolution is
mainly dependent on Ijtihad or continuous pursuit for the best. The
effort can yield results when the discussions/deliberations are held
without making an attempt to prove the other side wrong. The correct
judgment can only be arrived at when all the ambiguities are removed.
According to an observer, "the task has become difficult for the
present generation because Ijtihad virtually remained suspended for
centuries. This is the age of information technology and efforts
should also be made to take advantage of the work done in the past.
All the fragmented efforts should be linked to avoid reinventing of
the wheel".

Some of the banking sector experts demand that the
regulators should provide some incentive for adopting Islamic
financial system to encourage people to switchover from conventional
banking system to Sharia compliant system. However, the propagators of
Islamic banking say, "We do not want any incentive but have a
right to demand level playing field. There are certain rules and
regulations, which in turn penalize the followers of Islamic banking
system. These distortions should be removed at the earliest.

The creation of parallel Islamic banking system
offers a choice to people. It was very aptly said by an ardent
follower of Islamic banking, "In the market two chickens are
available, one which has been slaughtered according to the teaching of
Islam and the other in violation of these rules. In such a scenario
the logical choice for Muslim is to buy the chicken that has been
slaughtered according to the Islamic teaching. The same is also true
about Islamic and conventional banking, one conforms to Sharia and
other does not. Therefore, it is the responsibility of every
individual to pick up only that product which is Halal.

Keeping in view the low literacy level in the
country and poor level of awareness among the masses, it is necessary
that programs should be arranged where religious scholars, bankers
economists and regulators should respond to the queries of the people.
In this regard the latest effort of Standard Charted Bank deserves
specific mention. The bank invited to prominent Sharia scholars to
Pakistan at the opening of their second Islamic banking branch. Taking
the advantage of their presence it also arranged 'Meet the Scholars'
program. The two distinguishing factors of this program were 1) there
was no monologue (long speech) and 2) carefully picked up questions by
the moderators. Dr. Abdul Sattar Abu Ghuddah and Sheikh Nizam Yakubi
very eloquently responded to each question. Though the program was
pretty lengthy but a large number of questions could not be taken up
due to time constraint. The program was also recorded and aired by a
channel, which must have provided an opportunity to general public to
listen to these scholars. However, there are two suggestions 1) that
the bank should print the proceedings in the form of a booklet and
also prepare CDs/video tapes and make them available to general
public. It will be a great service to the cause of Islamization of the
financial system.

Since all the banks involved in Islamic banking
have religious advisors they should also arrange similar programs.
There is still a lot of ambiguity about the Islamic banking as well as
Islamic financial system. This can be removed only by arranging
greater interaction with the religious scholars and the bankers. It is
also suggested that banks should also sponsor such programs on
television networks. According to an old saying, "The taste of
pudding is in eating" and people cannot get the experience unless
they experience the Islamic banking mode.

It is heartening that Islamic banking has been
working in parallel with conventional banking system in the country.
The central bank and the players have created the infrastructure and
now it is up to the public to use it. One may say there are still some
weaknesses in system. However, these weaknesses cannot be removed
without active participation of all the stakeholders.

The confidence of the sponsors of Islamic banks in
the system is evident from the fact that all these banks are starting
their operations with larger capital base. The minimum paid-up capital
requirement is Rs 2 billion till 31st December 2005. This, in fact,
helps them start operation with greater liquidity and remain free from
borrowing funds from others.

Though the point may not be too relevant but needs
specific mention. A number of Islamic funds have been floated in the
country. They are in a position to participate in pre-IPO placements
as well as ensuring adequate liquidity of the shares of the companies
offering Sharia compliant products and services.